Image Source: PixabayThis past week’s economic reports delivered two pieces of good news for the U.S. economy and the stock market. First, inflation is down a lot. The Consumer Price Index (CPI) came in flat; the year-over-year reading is 3.2%. Both readings were unexpected, and the market surged.Similarly, the Producer Price Index (PPI) was unexpectedly negative, with prices falling 0.5% in October. This decline likely means a lower CPI in the future. Costs are dropping or remaining constant, suggesting inflation is approaching sub-3%. Moreover, U.S. Treasury bond yields fell, as did mortgage rates.For dividend growth investors, it all adds up to positive news. As Treasury yields decline, income stocks become more competitive. Consequently, I remain a buyer in dips, and have added to Clorox (CLX), T. Rowe (TROW), Johnson & Johnson (JNJ), and Cisco (CSCO) because they are seemingly undervalued. I also started a position in American States Water (AWR), which I have wanted to do for many years.
Stock Market Overview
Data from Stock Rover shows that the stock market had an impressive week. After struggling all year, the Russell 2000 surged over 5%. Its performance was followed by the Nasdaq Composite, the S&P 500 Index, and the Dow Jones Industrial Average. All the major indexes had at least a 2% return.All 11 sectors had gained this week. Because of lower interest rates, Real Estate, Consumer Cyclical, and Basic Materials were the top three sectors. But the Healthcare, Energy, and Consumer Defensive sectors finished at the bottom but with positive returns.Oil prices trended lower before bouncing back but finished with a loss settling at ~$76 per barrel. Demand remains weak, supply is strong, and the amount in storage is increasing. These trends suggest oil prices will remain under pressure. The VIX fell another 2.5% to below its long-term average. Gold advanced to $1,984 per ounce on a weaker dollar. Source: Stock Rover
The Nasdaq is performing the best for the year, followed by the S&P 500 Index, the Dow 30, and the Russell 2000. Bullish sentiment is still strong for technology and growth stocks. The Nasdaq Composite has recovered much of its losses in the recent correction. The S&P 500, DJIA, and Russell 2000 are all positive year-to-date.In addition, seven of the 11 sectors are up year-to-date. The three best-performing sectors are Technology, Communication Services, and Consumer Cyclical. But the worst-performing sectors are Consumer Defensive, Healthcare, and Utilities. Source: Stock RoverThe dividend growth investing strategy has returned to positive results across all categories. The recent market volatility has lowered returns, but the trend has reversed. The table below shows their performance by category.
YTD Return (%)
Source: Stock Rover
Stock Market Valuation This Week
The S&P 500 Index trades at a price-to-earnings ratio of 24.94X, and the Schiller P/E Ratio is about 30.56X. These multiples are based on trailing twelve months (TTM) earnings. The long-term means of these two ratios are approximately 16X and 17X, respectively. The market is still overvalued despite the recent correction, the bear market, and the recent rebound seen in the markets. Earnings multiples of more than 30X are overvalued based on historical data.
Economic News This Week – Consumer Price Index
The U.S. Bureau of Labor Statistics reported the consumer price index was unchanged in October; this follows seasonally adjusted readings of (+0.4%), (+0.6%), and (+0.2%) over the previous months. The all-items index has increased (+3.2%) over the last 12 months. This compares to (+3.7%), (+3.7%) and (+3.2%) over the previous months.The shelter index, which makes up about one-third of the CPI weighting, continued to rise (+0.3%) but was offset by a (5.0%) drop in the gasoline index. The shelter index has now increased for 42 consecutive months.The energy index declined (-2.5%) and follows a (+1.5%) reading the previous month, with decreases coming from all energy sub-indexes, except for the indexes for natural gas (+1.2%) and electricity (+0.3%). The food index increased (+0.3%) from a (+0.2%) reading over the previous three months.Core CPI inflation, which excludes food and energy, increased (+0.2%) in October and follows readings of (+0.3%), (+0.3%), and (+0.2%) over the previous months. The annual rate of core CPI inflation is now at (+4.0%) as compared to (+4.1%), (+4.3%), and (+4.7%) over the previous months. It is the smallest 12-month change since September 2021.The shelter index increased (+6.7%) year-over-year, accounting for over 70% of the total increase in Core CPI. Other indexes with significant gains over the last year include motor vehicle insurance (+19.2%), recreation (+3.2%), personal care (+6.0%), and household furnishings and operations (+1.7%).
Retail and Food Sales
The Commerce Department reported advance U.S. retail and food services sales decreased (-0.1%) to $705.0 billion in October; this follows an upwardly revised (+0.9%) from (+0.7%) increase for September. This marks the first decrease after six consecutive monthly increases.Retail sales are up (+2.5%) year-over-year. Total sales for August 2023 through October 2023 were up (+3.1%) year-over-year. Retail sales are primarily goods and are not adjusted for inflation. A (-1.0%) drop in sales of autos and parts contributed to the decline. Excluding auto sales, retail sales were up (+0.1%). Spending was mixed with increases in personal care (+1.1%), electronics & appliances (+0.6%), food & beverage (+0.6%), restaurants (+0.3%), and internet retail (+0.2%), offsetting decreases in home furnishings (-2.0%), miscellaneous retail (-1.7%), sporting & hobby (-0.8%), building materials (-0.3%), gas stations (-0.3%), and general merchandise (-0.2%).Core retail sales, a measurement that excludes spending on autos, gasoline, building materials, and food services, increased (+0.2%) in October. September’s core retail sales were revised to show sales increasing (+0.7%) instead of (+0.6%).
Residential Building Permits
The U.S. Census Bureau reported new residential building permits were up (+1.1%) in October to a seasonally adjusted 1.471 million, (-4.4%) below the October 2022 rate of 1.555 million. Single-family permits were up (+0.5%) to 968,000 from a downwardly revised September figure of 963,000. Regionally, single-family permits were mixed with readings of Northeast (+7.4%), West (+2.0%), Midwest (-1.7%), and South (-0.2%).Permits for 2 to 4 units were reported up (+2.0%), and five units or more were up (+2.2%). Privately-owned housing starts increased (+1.9%) to 1.372 million, from a downwardly revised September estimate of 1.346 million, and (-4.2%) below the October 2022 rate of 1.432 million. Single-family starts were up (+0.2%) to 970,000 as single-family homebuilding increased in the Northeast (+12.0%) and West (+12.3%), while the South (-4.9%) and Midwest (-0.9%) both saw decreases. Housing starts for five units or more increased (+4.9%) to 382,000 from a downwardly revised September figure of 364,000 and are down (-31.8%) year-over-year.Privately-owned housing completions reported at 1.410 million, down (-4.6%) from September’s upwardly revised 1.478 million reading and up (+4.6%) over October 2022. Single-family housing completions were reported at 993,000, a (-0.9%) decrease from September’s upwardly revised rate of 1.002 million, up (+2.0%) from October 2022.More By This Author:Dividend Safety Analysis: Cisco Systems3 High Yield Stocks For Long-Term IncomeStock Market This Week – 10/29/23